Euro crisis could make loans more expensive

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If you're thinking about taking out a personal loan, you should get cracking. The euro crisis means that loan rates look set to rise.

Rates for personal loans have fallen a lot over the last year and the current market-leading loan comes with a cracking 6.1% rate. However, such low rates probably won’t last for long. I believe that the horrendous euro crisis could make personal loans more expensive and also make them harder to get.

Libor

It’s all down to something called Libor (the London Interbank Offered Rate.) This is the rate at which banks are prepared to lend to each other.

In normal times, you’d expect Libor to be just a little bit higher than the Bank of England’s base rate. So back in January 2005 – long before the financial crisis – the main Libor rate was 4.89% while the base rate was 4.75%. The difference between the two rates was just 0.14%.

However, if banks are worried that other banks might go bust, they start to charge higher rates for any loans they make to other banks. And when you look at the current Libor rate, it’s clear that at least some banks are getting worried.

The current Libor rate is 1.01% which is 0.51% higher than the Bank of England’s base rate. Admittedly, the differential was much bigger back in October 2008, but it’s clear that Libor is on the up and above its long-term average. Look at this table:

3-month Libor rate compared to Bank of England base rate

Date

3-month Libor rate (Sterling) %

Bank of England base rate %

Difference between Libor and base rate %

14 November 2011

1.01

0.5

0.51

14 July 2011

0.83

0.5

0.33

15 March 2010

0.65

0.5

0.15

15 June 2009

1.25

0.5

0.75

1 October 2008

6.31

5

1.31

2 January 2005

4.89

4.75

0.14

3-month Libor rate measures how much it costs for banks to borrow in sterling for three months. There are other Libor rates for different durations and currencies.

Libor has risen because the euro crisis has revived worries that some European banks might go under. Some commercial banks have lent substantial amounts to Greece, Italy and other troubled economies, and if, say, Italy defaults on its debts, some banks could be in very serious trouble indeed.

If Libor continues to rise, some banks will have less money to lend to businesses and individuals and will become more picky about who they lend to. They’re also likely to raise the rates they charge. Some mortgages could become more expensive too.

So if you’re thinking about getting a personal loan, I’d recommend that you don’t hang around. Most personal loans have fixed rates, so if you took out a loan now at 6.1%, you could lock in that rate and it wouldn’t matter if rates for new borrowers rose next year.

Best rates

You can get that 6.1% rate from Nationwide Building Society. However, that rate is only on offer to people who already have a Nationwide current account or who open a current account now. You’ll also need to borrow between £7,500 and £15,000.

If you don’t have a current account with Nationwide, you could still get a cracking loan from the building society at 6.2%. You could also borrow at 6.2% if you took out a Sainsbury’s Finance Shopper Loan. Once again, you’ll have to borrow between £7,500 and £15,000 and you’ll also need to have a Nectar card. This rate is a special offer that ends on November 21st.

It’s worth stressing that not all applicants will get these loans. Lenders only want to offer personal loans to people with good credit ratings. What’s more, some successful applicants probably won’t be offered the best rates. Lenders are only obliged to offer their best rates to 51% of successful applicants.

But the crucial point is that we expect lenders to get even more picky if Libor rises further as we expect. So it makes sense to get cracking and apply now. And even if you think I’m talking rubbish about Libor, it still makes sense to apply now as Sainsbury’s will withdraw their 6.2% offer next week. So don’t hang around!